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Insurance Insider
1st December 2014

The European Insurance and Occupational Pensions Authority (Eiopa) has estimated that 24 percent of insurers would fail to meet solvency capital ratio (SCR) standards in an extended low-yield environment.

Eiopa’s latest stress test showed that if interest rates are still cripplingly low in eight to 11 years’ time, almost a quarter of the 225 companies from the 28 EU countries and Norway would see their SCR fall below 100 percent.

Today, 14 percent of companies, representing 3 percent of total assets, have an SCR ratio below 100 percent.

The test estimated a baseline scenario using the upcoming Solvency II regime, without internal models, and applied two main scenarios to test the insurers. These were a “double hit” of low interest rates and a sharp reversal in asset prices, and a low-yield module that considered a prolonged Japanese-style period of low interest rates.

Eiopa said the baseline scenario indicated that the sector is in general sufficiently capitalised in Solvency II terms.

As a follow-up to the stress test, Eiopa issued a set of recommendations to address the vulnerabilities it had identified in a coordinated way.

National regulators should engage in a rigorous assessment of the preparedness of their undertakings, in particular regarding the situations where capital increases and/or balance sheet management actions will be needed.

They also need to ensure that carriers have a clear understanding of their risk exposures and their vulnerability to given stress scenarios and that they have the capacity to take recovery actions if those vulnerabilities materialise, Eiopa said.

The European insurance watchdog’s chairman Gabriel Bernardino said: “Eiopa’s stress test 2014 was a truly preventive supervisory tool. It gave EU supervisors an updated picture of the undertakings preparedness to comply with the upcoming Solvency II capital requirements and by applying a set of rigorous and severe stresses indicated to us the areas where undertakings are most vulnerable.”

Olav Jones, deputy director general at trade body Insurance Europe, said: “Europe’s insurers welcome the results of the Eiopa stress tests, which clearly demonstrate the resilience of the European insurance industry ahead of the implementation of Solvency II in January 2016.

“The stresses used were very severe and covered all the major risks that insurers take on to protect their policyholders. The fact that the insurers’ capital went down after these kinds of severe events is quite normal. To see that, even after such severe events, generally companies will still be able to meet their full solvency capital requirements is an indication that overall levels of solvency are very high.

“As pointed out in the recommendations of this report, there is still work for both the industry and national supervisors to do in preparation. To that end, the industry continues to work hard with Eiopa and national supervisors to prepare for Solvency II implementation,” he concluded.

In the UK, the Association of British Insurers said that the results of the stress test proved that the European industry was well prepared ahead of the implementation of Solvency II, and that it was ready to cope with the extreme situations tested.